10% if starting at 20, 15% at 30, etc. - still applicable?

DreamerV

Hi,

I just wondered if the rough guidelines of contributing half your starting age as a percentage towards pensions is still valid given worse growth/annuity rates?

I'll be contributing (in total including employer's contribution) 18% from age 32 and don't think I could manage more even if I wanted to, because I'll be paying a mortgage from around age 31, and would like to work on reducing that.

But is there a new ideal rate of contribution? E.g. if intermediate growth rate is projected at 5% instead of 7%, this is a decrease of around 30%. Should starting age be halved and then multiplied by 1.3 to make up for this? E.g. Age 32: 16% x 1.3 = 20.8%.

I may be way off the mark, as it was a fleeting thought rather than something I've thought about in great detail.

HappyMJ

DreamerV wrote: »

Hi,

I just wondered if the rough guidelines of contributing half your starting age as a percentage towards pensions is still valid given worse growth/annuity rates?

I'll be contributing (in total including employer's contribution) 18% from age 32 and don't think I could manage more even if I wanted to, because I'll be paying a mortgage from around age 31, and would like to work on reducing that.

But is there a new ideal rate of contribution? E.g. if intermediate growth rate is projected at 5% instead of 7%, this is a decrease of around 30%. Should starting age be halved and then multiplied by 1.3 to make up for this? E.g. Age 32: 16% x 1.3 = 20.8%.

I may be way off the mark, as it was a fleeting thought rather than something I've thought about in great detail.

There is no ideal rate. The more you save into a pension the less you have to save into ISA's and therefore the lower deposit you have when you want a mortgage. The ideal deposit on a property is "as much as possible" but really 25% of the property value will get you the best mortgage interest rate. Your net pay is also lower which qualifies you for a lower mortgage amount had you not made any pension contributions at all.

Personally, and it's not for everyone...I'll save without the pension. I have saved cash and put down a 25% deposit on a house then taken out a large mortgage and put all savings into paying off the mortgage which later on I can sell and downsize and use the cash as I see fit.

DreamerV

HappyMJ wrote: »

There is no ideal rate. The more you save into a pension the less you have to save into ISA's and therefore the lower deposit you have when you want a mortgage. The ideal deposit on a property is "as much as possible" but really 25% of the property value will get you the best mortgage interest rate. Your net pay is also lower which qualifies you for a lower mortgage amount had you not made any pension contributions at all.

Personally, and it's not for everyone...I'll save without the pension. I have saved cash and put down a 25% deposit on a house then taken out a large mortgage and put all savings into paying off the mortgage which later on I can sell and downsize and use the cash as I see fit.

This is an interesting take. In my case, I'll be saving for deposit and have started the mortgage before starting to make large pension payments. I'll be aiming for 25% deposit. I'm not sure overpaying the mortgage will make up for lost pension contributions (as I'll contribute 4.8% pre tax, and them 12%, totaling 18%) so I'll be overpaying only as and when I can afford it. I understand my employer is quite generous, and this may make it better for me to stick to pensions (depending on how good/bad my mortgage rate is!)

For you, what if house values stay fairly depressed? Do you make any contingent plans? I've seen a fair few people on these boards saying similar to you. With projected rates down (and I think they are unlikely to even 3.5 let alone 5%), I can see why some are disillusioned with pensions.

dunstonh

That half age guide has never been anything more than a quick and dirty guide to get people thinking about realistic contribution levels. It has never carried enough accuracy to be concerned about market rates.

HappyMJ

DreamerV wrote: »

This is an interesting take. In my case, I'll be saving for deposit and have started the mortgage before starting to make large pension payments. I'll be aiming for 25% deposit. I'm not sure overpaying the mortgage will make up for lost pension contributions (as I'll contribute 4.8% pre tax, and them 12%, totaling 18%) so I'll be overpaying only as and when I can afford it. I understand my employer is quite generous, and this may make it better for me to stick to pensions (depending on how good/bad my mortgage rate is!)

For you, what if house values stay fairly depressed? Do you make any contingent plans? I've seen a fair few people on these boards saying similar to you. With projected rates down (and I think they are unlikely to even 3.5 let alone 5%), I can see why some are disillusioned with pensions.

It's not overpaying...it's buying the biggest property that you can stretch to...even overstretching so that you have no spare income and you get the benefit of a nice house to live in and when your family has been raised and left home and you need to you can then sell the big house and move into something smaller and then have some money to spend as you please. House prices if they stay depressed will be depressed for the whole market but will always almost match wage inflation...the more people earn the more they can spend on a property. Once lending opens up again and banks are willing to lend with smaller deposits then house prices will again increase. For the short term I don't see them rising by much though.

Personally I overstretched by borrowing the maximum available as it gave me an incentive to earn more in my job to have more money to spend on my lifestyle.

Although 4.8% of your gross income isn't much so I'd stay with it.

jamesd

Overpaying on a mortgage won't make up for missed pension contributions. Investment growth rates are significantly higher on average than mortgage interest rates so if you're willing to invest, making mortgage capital payments is expected to make you worse off.

It's worth considering S&S ISA investing as well as or instead of some pension investing. The advantage here is that this money can be used to fund retirement before pension money can be taken or to top up available income above those allowed from a pension pot. That topping up is good if you retire between the first age you can take pension income, currently 55, and state pension age.

Spending more by buying a bigger property than you need is a waste of money. Unless you want to use your home as an investment and are willing to use leveraged residential property investing. Otherwise you're subjecting yourself to higher costs for no good reason. Instead you can invest outside a pension and choose to use the accumulated money to buy a bigger place later if you want to. Meanwhile you'll have had lower expenses and more money to invest.

marathonic

I agree with dunstonh.

Take the H-L Pension Calculator for example:

Default Assumptions:
2.5% Inflation (used to calculate pension in today's money and factor by which your contribution increases annually)
7% Growth
1% AMC
50% Spouses Pension
Pension rising annually by 3%
5 year guarantee
No Tax-Free lump sum taken

Using the above assumptions, a 20 year old starting today will get almost the same pension every week as their starting monthly contributions. So contribute £50 per month and you get a £49.89 weekly pension.

A lot of 20 year olds thing they're doing great contributing £50 per month and that's where the 'half your age' rule comes in and tells them that, if they're earning £24,000 p/a, they should be contributing at least £200 per month.

If growth rates were 5% instead of 7%, that £50 monthly contribution would get you a pension of £22.88 weekly. A £200 monthly contribution at this rate would get £91.52 weekly.

For what it's worth, when looking at pension figures, don't look at £91.52 weekly as an increase of 63% over the state pension of £144 weekly. It should be looked at as double, or even triple the discretionary expenditure in retirement.

What I mean by this is that, of your £144 state pension, £100 might go on essentials like medical, heating, electricity, council tax, food, etc. This leaves you with £44 'fun money'. Your £91.52 private pension basically triples your 'fun money' in these circumstances.

Another way to look at it is that £44 'fun money' would allow you to go to bingo, have the odd pint, etc. in retirement. Add £20 per week to this, and you've now got an annual holiday.


ALWAYS CONTRIBUTE ENOUGH TO GET YOUR EMPLOYER CONTRIBUTIONS. After this, your own 'tax situation' will tell you whether you should put excess into an ISA or your pension. In general, higher-rate tax payers or those on salary sacrifice schemes should seriously consider putting excess towards the pension unless they can see themselves needing the money pre-retirement.

marathonic

jamesd wrote: »

Spending more by buying a bigger property than you need is a waste of money. Unless you want to use your home as an investment and are willing to use leveraged residential property investing. Otherwise you're subjecting yourself to higher costs for no good reason. Instead you can invest outside a pension and choose to use the accumulated money to buy a bigger place later if you want to. Meanwhile you'll have had lower expenses and more money to invest.

Not necessarily. If you buy bigger than you need now, but a size that you can see yourself needing in the next 5 years, then it's not always a waste of money.

I bought bigger than I need because I'm single but can see children and marriage down the line.

You need to decide whether the costs of buying and running a larger property outweigh the costs of moving in a few years.

With the costs of moving estimated to be in the region of £5,000 (removals companies, solicitors, estate agents, mortgage arrangement fees, making the new house liveable, etc.), I feel that the extra expense incurred with my house will be worth it in the long run.

It also depends on where you see house prices going because, if they were to rise, you'd need to add more to that £5,000 moving figure.

marathonic

HappyMJ wrote: »

House prices if they stay depressed will be depressed for the whole market but will always almost match wage inflation...

I'm in Northern Ireland and can picture the situation had a potential retiree used your plan and intended to retire in 2007 at age 65.

Prices are now down a little over 60% in real terms since 2007. Obviously, if your house is your only pension, you'd be trying to get as much as possible for it and so, wouldn't have accepted below market value at any point.

There are a lot of houses that have been on the market for 4-5 years so picture the retirement planning (real terms):

2007
House Value: £400,000
Downsized House Value: £200,000
Difference to Invest: £200,000
Annual Withdrawal: £8,000 (4%)
Weekly Pension: £154

2013
House Value: £160,000
Downsized House Value: £80,000
Difference to Invest: £80,000
Annual Withdrawal: £3,200 (4%)
Weekly Pension: £62

So the above person had a £400,000 house intending to retire at 65 with a downsized house and £154 pension. They are now 71 and can only afford a downsized house and a £62 pension.

For what it's worth, I'm 30 and my pension pot would secure a pension of £37 per week with a 4% withdrawal rate. So I'm more than half-way towards the same retirement as the hypothetical 71 year old above.

Regardless of how bullish you are with regards to property, you cannot say that the above cannot happen in England/Scotland/Wales over the next 30-40 years - I wouldn't like to bet my retirement on it anyway.

The above doesn't take into the account that noone wants to live in a house of half the value after working hard all their lives.

jamesd

marathonic wrote: »

You need to decide whether the costs of buying and running a larger property outweigh the costs of moving in a few years. ... It also depends on where you see house prices going because, if they were to rise, you'd need to add more to that £5,000 moving figure.

I agree, sometimes it can make sense, sometimes not. It does depend on the figures but the cost of bills can add up if you're not really getting any added value from the more costly place.

If you think of prices rising then it's fine in that situation to buy a more costly place as an investment instead of purely as a home.

DreamerV

HappyMJ wrote: »

It's not overpaying...it's buying the biggest property that you can stretch to...even overstretching so that you have no spare income and you get the benefit of a nice house to live in and when your family has been raised and left home and you need to you can then sell the big house and move into something smaller and then have some money to spend as you please. House prices if they stay depressed will be depressed for the whole market but will always almost match wage inflation...the more people earn the more they can spend on a property. Once lending opens up again and banks are willing to lend with smaller deposits then house prices will again increase. For the short term I don't see them rising by much though.

Personally I overstretched by borrowing the maximum available as it gave me an incentive to earn more in my job to have more money to spend on my lifestyle.

Although 4.8% of your gross income isn't much so I'd stay with it.

Ah ok, sorry HappyMJ - I hadn't quite grasped what you meant before, but I get it now. I may be planning things differently, but it is useful to see what everyone else is doing. Thanks for explaining.

I do also think house prices will rise again (above inflation) but perhaps not with the same vigour as previously. It sounds like since you'll be downsizing, this is not as important as I first thought. It sounds like a reasonable enough alternative. If I was to stretch to the biggest property I could afford, I think I would rent out a couple of rooms to lodgers, possibly making large enough gains to max out an S&S ISA yearly for my future. I just think I could do without the hassle

(Also I meant 6% of my gross, at 4.8% cost to me net, but yes it's not much to gain 12% from employer)